Working Paper: CEPR ID: DP3453
Authors: Gyngyi Lrnth
Abstract: This paper analyses the effects of scope expansion on the core activity of banks and provides a rationale for their interest in offering a wider product range. We show that scope economies may stem from moral hazard in the core business, and argue that a cost of scope expansion might be the inability of banks to credibly commit to penalize their clients in the event of default or poor performance. We find that inefficiencies in conglomerate banks are more prone to occur when competition in the additional activity is intense, and when willingness of firms to pay for a new financial product is higher.
Keywords: asymmetric information; financial innovations; mergers
JEL Codes: G20; G30; G34; L20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| moral hazard (G52) | scope economies (D26) |
| competition intensity in additional activities (Z29) | inefficiencies in conglomerate banks (L22) |
| willingness of firms to pay for new financial products (G29) | inefficiencies in conglomerate banks (L22) |
| scope expansion (Y60) | inefficiencies in conglomerate banks (L22) |